Wind the clock back six years ago to the peak of the UK’s housing market and mortgage options for homeowners approaching, or already in, retirement were plentiful.
Most banks and building societies would lend up to the age of 85, making it relatively easy for a large number of borrowers in their 60s to get a home loan.
Back in 2007, there were even press reports that a 102 year-old man from East Sussex had been given a 25-year remortgage loan on his buy-to-let property.
Fast forward to today and the picture is very different for older borrowers.
Their mortgage choice has shrunk rapidly as lenders have pulled specialist lending into retirement product ranges and cut their maximum lending age limits en masse.
Mortgage Strategy’s recent poll found that 68 per cent of respondents believed banks and building societies are too strict when it comes to lending to the over 60s.
In the past two months alone, three lenders have cut the maximum age on their standard mortgage ranges from 80 to 75.
In September, Leeds Building Society reduced the maximum a borrower can be at the end of their mortgage term to 75 and also withdrew its lending into retirement range, aimed at borrowers typically aged 60 and over, from the market.
This followed similar moves by Skipton and Newcastle Building Society in August.
Mortgage brokers say the catalyst for this change was the credit crisis back in 2008. John Charcol senior technical director Ray Boulger says before the downturn there was plenty of mortgage choice for borrowers approaching retirement.
“It was the credit crunch which really kicked off the change in lenders approach to older borrowers,” he says.
“Banks and building societies had to find ways of restricting their lending and this was a convenient way of cutting back their exposure.”
Lending into retirement gets a jolt
In July 2009, Abbey – now Santander – was one of the first major lenders to pullback from lending into retirement. It reduced the maximum age at the end of a mortgage from 85 to 75 years old.
“As a responsible lender, we are committed to ensuring the affordability of mortgages for all our borrowers and believe this move is prudent for mortgages ending beyond the normal retirement age,” at the time the bank said.
A few months later the regulator’s announcement that it would be launching a review into the mortgage market to put an end to irresponsible lending of the boom days gave a further jolt to the sector.
While the regulator – then known as the Financial Services Authority – was particularly worried about self-cert lending and interest-only loans, it also flagged up concerns about lending into retirement.
“The Mortgage Market Review aggravated the situation. Lenders got concerned that lending into so-called retirement might be considered inappropriate or irresponsible,” says Boulger.
But it wasn’t only the FSA’s rhetoric on lending into retirement that had a big impact on this segment of the market.
The Mortgage Market Review aggravated the situation
The crackdown on interest-only mortgages provided a massive blow for older homeowners.
During the 1980s it was common for borrowers to take out an interest-only mortgage alongside an endowment policy that was supposed to deliver a superior return to the interest rate on the loan.
However, the anticipated returns proved optimistic, leaving millions out of pocket. Banks have since refunded billions of pounds in mis-selling claims to these customers.
Interest-only mortgages became popular again in the 2000s as a way to maximise the amount homebuyers could borrow as property prices rose.
Paying just the interest on loans typically knocked hundreds of pounds off monthly repayments so some banks were willing to lend more.
The FSA’s signal that it wanted tougher affordability checks, particularly for borrowers taking out interest-only mortgages, saw lenders significantly pullback from offering these loans.
By August 2010, a large number of lenders had radically tightened their criteria on interest-only deals.
Coventry Building Society stopped offering the product to first-time buyers or those requesting more than £500,000, following an earlier move by Lloyds Banking Group – the UK’s largest lender.
Other banks such as Santander and Northern Rock had significantly reduced the number of accepted repayment vehicles.
The shadow of interest-only
Today there are few interest-only mortgage options available to homeowners.
Several lenders have exited the market, including Nationwide and Co-operative Bank. Others have introduced such restrictive lending criteria that it is practically impossible for borrowers to get a loan.
Research by the FSA’s successor the Financial Conduct Authority published in May this year highlights why this is a problem for older borrowers.
Its own research shows that those approaching and in retirement make up a disproportionate number of those with interest-only loans they cannot afford to pay.
It has identified three peaks over the next 30 years where large numbers of interest-only are due to be repaid – the first in 2017-2018.
Nearly everybody of my generation will not retire at 65 so the nature of products will need to change
These are mostly endowment mortgages sold in the 1990s and early 2000s.
These borrowers are typically individuals approaching retirement, the FCA said.
Large numbers of interest-only loans are then due to mature in 2027-8 and 2032, and are characterised by less affluent individuals with higher debt levels.
It may be slightly ironic that the clamp down on lending into retirement comes at a time when people are working for longer.
While lenders were tightening their criteria for older borrowers, the government (in 2011) scrapped the default retirement age of 65.
According to the Office for National Statistics, record numbers of people are now working past retirement age. In the first quarter of this year, 980,000 Britons aged over 65 were in employment.
Surely this should have encouraged lenders to become more flexible in their approach to older borrowers? Building Societies Association head of mortgage policy Paul Broadhead says there has not been a huge amount of product innovation in recent years.
“Given that it is no longer the norm for people to work 40+ years and retire at 65, and the fact that we no longer have a mandatory retirement age people are increasingly choosing to move to part time roles either for financial reasons beyond 65 or to stay engaged in the workplace,” says Broadhead.
Time for a change of approach
But Lentune Mortgage Consultancy managing director Stuart Gregory questions whether the recent policies by lenders meet the FCA’s Treating Customers Fairly principle.
He says: “Is it fair to lend to borrowers five years ago on the basis that they had until the age of 85 to repay the loan, yet a few years later, reduce the maximum age at the end of the term to 70 or 75?”
Earlier this year, several high profile industry chiefs said lending into retirement must become easier. In a panel discussion at the Sesame symposium in January, Sesame chief executive George Higginson said current restrictions are “not right” and failed to reflect the needs of a workforce which is being asked to work for a larger proportion of life.
“It is not right to expect people to pay off before retirement,” he said.
“Nearly everybody of my generation will not retire at 65, they probably have to work into retirement. If that is the case now, the nature of products we have to have will also have to change.
“I think we are behind the curve on this and I do think we need to bring out new designs and products.”
Partnership chief executive Steve Groves agreed that there needed to be a change in approach.
“If you accept this flexible retirement, saying we are not going to allow people in retirement to service a mortgage, even if they can, is unacceptable,” he said.
According to Boulger, the publication of the final Mortgage Market Review rules last December should have seen lenders relax their criteria, as despite the regulator’s earlier rhetoric it did not introduce strict rules banning mortgages into retirement.
This is something Gregory agrees with, on the basis that the MMR is essentially all about proving affordability.
“As long as this can be proven, surely it is as secure as any other form of lending?” he says.
“Reasonable questions should be asked of potential borrowers as to their future – what would happen if one party to the mortgage passed away? How would they be able to maintain the mortgage? Sensible lending practices should not be sidelined just on a ‘numbers game’.”
The domino effect
According to brokers, Halifax’s decision to pull its Retirement Home Plan mortgage in August 2011 had one of the biggest impact on the over 60s mortgage market. Under the terms of the scheme, homeowners over the age of 65 could borrow up to 75 per cent of the property’s value on an interest-only basis, with the lump sum repaid when the property is sold.
The product was an alternative to conventional roll up equity release plans and an attractive option for older homeowners.
Boulger believes Halifax’s exit from the market immediately put pressure on other lenders. This caused a domino effect of rival lenders tightening their criteria to make sure they do not become too exposed to lending in this segment.
These days, people are working longer, so naturally they will have a monthly income coming in
Trinity Financial product and communications manager Aaron Strutt says regional building societies say they are being “absolutely inundated” with applications from older borrowers. More applications are coming in than the lenders want to receive.
This reason was cited by Leeds Building Society for its decision to tighten its criteria.: “We took the decision to reduce the maximum age at the end of the mortgage term to 75, from 80, and withdraw the Lending into Retirement range,” says Leeds Building Society head of corporate communication Gary Brook.
“This brought us more in line with other lenders and reduced volume in this segment, which is appropriate and aligned with our balanced lending appetite.”
The lack of choice is causing concern for charities and companies that serve the older generation. Saga director of communications says it is “outrageous” that older people are struggling to get mortgages.
“These days, people are working longer, so naturally they will have a monthly income coming in, which means they should be able to pay their mortgage each month,” he says.
Other organisations focussed on the elderly like charity Age UK are also concerned at the current trend.
“While we do not condone lending to people who are not in a position to repay a loan, we are concerned that banks continue to set arbitrary limits when it comes to approving mortgages,” says Age UK charity director Caroline Abrahams.
“Decisions like these should be objectively justified on an individual’s risk not on the basis on an out of date one size fits all vision of what it means to be older.”
Cautious approach to elderly spreading
A key question for mortgage intermediaries will be whether it is good advice to offer a mortgage to a borrower over the age of 65 and this will largely depend on the individual.
“If a borrower is already retired with a fixed pension income then a lender can underwrite that loan with certainty that the borrower can afford to make the repayments,” says Broadhead.
Once the MMR is introduced in April, affordability will be the lenders focus rather than whether the applicant is over or under the age of 65.
Communication from lenders is improving, but in most cases, it’s bringing bad news
However, retirees with buy-to-let portfolios do not need to worry. The cautious approach by lenders in the residential market has not been adopted by buy-to-let lenders.
According to Mortgages for Business, The Mortgage Works has a maximum age limit of 90, while Aldermore and Keystone will go up to 85. Skipton Building Society has no age limit.
“Buy-to-let lenders generally may well be less cautious than residential lenders about lending into retirement because of the commercial nature of the transaction,” says Mortgages for Business head of sales Steve Olejnik.
But what about homeowners approaching their 70s now? What are their options?
“I’m beginning to get enquiries from new clients approaching the end of their mortgage term. Communication from lenders is improving, but in most cases, it’s bringing bad news,” says Gregory.
Some of the big banks offer borrowers some theoretical flexibility, such as providing a one year extension to the loan. Other big high street lenders are offering to switch the loan to a repayment mortgage – but only for a short term. This often makes the monthly payments unaffordable for the borrower.
Not Mission Impossible, yet
But despite all of the recent tightening, it is not impossible to get a home loan. John Charcol recently arranged an interest-only mortgage for a homeowner who was 92 years old through a small building society. Boulger says the mortgage was low risk as it was a low loan-to-value on a property worth over £1m.
Small building societies tend to be the most flexible. Kent Reliance, Norwich & Peterborough and The Teachers Building Society have a maximum age of 80, while Mansfield Building Society offers up to 85. National Counties and The Vernon Building Society do not have a maximum age.
There has been some product innovation over recent months. In July, National Counties launched an eight-year fixed-rate mortgage to new customers up to the age of 80 at the start of the loan. This means borrowers could be nearly 89 by the time they pay it off. It has an interest rate of 3.99 per cent with a £100 administration fee, available for borrowers with equity of 40 per cent or more.
A bigger step forward came with the launch of a new lifetime mortgage aimed at borrowers entering or in retirement. In September, retirement solutions provider Hodge Lifetime began offering an interest-only loan that does not require capital repayment until the borrower dies or moves permanently into long-term care. The initial rate of 4.75 per cent is fixed for five years after which it moves to a standard variable rate. Customers can borrow up to 50 per cent of the value of their property up to a maximum of £500,000.
For homeowners who do not meet these lenders’ criteria, equity release is the other – albeit more expensive – option. The equity release market is often cited as a potential solution to interest-only borrowers reaching the end of their mortgage term with a shortfall. However, it’s an area of the market where a homeowner needs specialist advice.